Currently, hundreds of billions of dollars are exchanged among banks, governments, and institutions in the foreign exchange (fx) markets each day. The mechanisms used in these markets have lagged behind the Internet revolution, however. These market mechanisms, in addition to operating on aging private-network and telephone-based technologies, also restrict participation in these markets by entities that are not part of the interbank network. When an entity without access to the interbank network (e.g., an individual or hedge fund) currently wishes to make a currency trade, that entity is only able to execute the trade through the limited set of banks with whom it has established credit facilities, as banks are concerned with counterparty risk, especially with the large size of typical over-the-counter fx trades.
Furthermore, because prices in the fx markets change rapidly, bids and offers quoted to clients over the telephone by their banks are “firm” only for a very limited amount of time. In order to get the best possible price, the client has to poll as many banks as it has credit lines with. While expensive private-networks such as Reuters provide bid/offer quotes from several dozen contributing banks, these quotes are merely indicative of the current bid and offer prices and thus are not firm bids or offers. Also, the quotes provided by these services have been shown to lag the market.
Still other factors affect fx market efficiency. Banks have little incentive to continue to do business with a client who calls for quotes frequently but rarely makes the trade. Thus, clients may feel the need to “farm out” trades by executing suboptimal trades in order to keep in good standing with their banks.
Instead of being concerned solely with market movements, an fx market participant must therefore contend with (1) obtaining timely quotes; (2) establishing credit lines in order to expand the number of banks with which to seek the best bid/offer prices; and (3) the politics of counterparty relationships.
Wright, Ben, “Unlocking the C2C forex riddle”, euromoney.com, Jul. 25, 2001, U.K., provides a general discussion of some of the business aspects of the present invention.
Morris, Jennifer, “Forex goes into future shock”, Euromoney, Oct. 2001, gives a general description of several computerized foreign exchange platforms, including one described in the present patent application.
Ahuja, R. K., Magnanti, T. L., and Orlin, J. B., Network Flows; Theory, Algorithms, and Applications, Chapters 7 and 9 (Prentice-Hall, Inc. 1993), U.S.A., sets forth some algorithms that may be useful in implementing the present invention.
U.S. Pat. No. 5,375,055 discloses a relatively simple trading system that is capable of implementing only single-hop trades. On the other hand, the present invention can accommodate multi-hop trades. Further, in U.S. Pat. No. 5,375,055, the user is given information that suggests to him that he can take a trade when he may not have enough credit to take the whole trade. In the present invention, on the other hand, if only part of a trade can be executed, that information is given to the user; the user knows that he has enough credit to execute at least the best bid and best offer that are displayed on his computer.
An even simpler trading system is disclosed in European patent application 0 411 748 A2 and in granted European patents 0 399 850 B1 and 0 407 026 B1, all three of which are assigned to Reuters Limited. These Reuters documents describe a system in which information concerning a potential trade is displayed even if the user can't execute it at all. In the present invention, such a potential trade would not be displayed at all. Furthermore, the only credit limits that can be accommodated in the Reuters system are volume limits for the purposes of limiting settlement risk. In the present invention, any agent may set credit limits in multiple ways so as to limit not only settlement risk (measured both by individual instrument volumes and by notional absolute values) but also exposure risk. Furthermore, the Reuters keystations require a human operator. In the present invention, on the other hand, an API (application programming interface) enables any participant to develop programs which partially or fully automate the trading process.